Is This The Chart That Has Bernanke So Worried?

Earlier we described why it is clear that the Fed will need to print exponentially to fill the void of the crunch in consolidated credit money but why does Bernanke remain so hedged and guarded in his optimism when the market is tearing bears' arms-and-legs off and every talking head from here to Tokyo is claiming we have reached the nirvana of self-sustaining recovery (with, we note one such reconstituted deal-maker claiming "we don't need the Fed's help anyway" after the FOMC meeting). It's the data stupid. Simply put, as the chart below shows, the strength of trend of key US data over the past three months has been disappointing in aggregate (of course one can cherry pick BLS prints or sub-indices of ISM) and the worrying similarities between 2011 (when the same overshoot of optimism occurred) is only too real a problem for Ben and his buddies if they take away the Kool-Aid too early once again and let us drink our own stale sugar-free water. So the next time you hear some long-only asset manager or octogenarian wealth adviser say the 'data has been very strong' so buy-and-hold big-tech or dividend-payers, do them a favor and remind them of this chart and what happened last year.

Commodities Crumble As Stocks Ignore Treasury Selling

While most of the talk will be about the drop in precious metals today, the sell-off in Treasuries is of a much larger relative magnitude and yet equities broadly ignored this re-risking 'signal'. At almost 2.5 standard deviations, today's 10Y rate jump (closing it above the 200DMA for the first time in eight months) trumps the 1.3 standard deviation drop in Gold prices - taking prices back to mid-January levels. According to our data (h/t JL) for only the 14th time in the last five years (and not seen for 16 months) Treasury yields rose significantly and stocks fell as the broad gains in yesterday's financials (on the JPM rip) were held on to at the ETF level but not for Morgan Stanley, Goldman Sachs, or Citigroup (who gave all the knee-jerk reaction back). Tech led the way as AAPL surged once again (though faltered a few times intraday) having now completed back-to-back unfilled gap-up-openings. Credit and equity were generally in sync until mid afternoon when the up-in-quality rotation took over and stocks and high-yield sold off (notably HYG - the high-yield bond ETF underperformed all day long) while investment grade credit rallied to multi-month tights. VIX bounced higher (notably more than the S&P would have implied) recovering to Monday's closing levels and back above 15%. The Treasury sell-off was 'balanced' in terms of risk-on/-off by the strength in the USD (and modest weakness in FX carry pairs as JPY's weakness was largely in sync with the rest of the majors - hinting its was a USD story). Oil and Copper both lost ground (as did Silver - the most on the day) though they tracked more in line with USD strength than the PMs.

Post the JPM News yesterday, it appears that BofA seems the most loved (?) - up almost 9%, Amex and JPM are equally loved at around +5.5% but GS, MS, and C are all down 0.25-1.0% from pre-JPM news having lost notably from last night's close...

Towards the latter part of the afternoon, there was the start of a modest risk-off sentiment as ES (the e-mini S&P future) couldn't get back up to VWAP and drifted lower along with high-yield credit as it appears the 'safety' trade is re-appearing for now as up-in-quality rotation into investment grade was clear...

The 10Y broke above key technical levels and while we are uncertain given the corporate supply calendar ahead, this was a dramatic absolute and relative shock to most traders...

The last two days have seen a rise in 10Y yields the likes of which we haven't seen in five months and the second largest in 16 months. In the last six months alone we have seen nine similar magnitude (percentage)drops in spot gold...

...but it was much more fun to talk about the huge USD-based drop in Gold today - as opposed to the relative change - but it is clear that Gold found some support back at pre-NFP levels from mid-January and Silver eventually gave way too and fell back to similar period levels...

FX markets were a one way street in general today with USD buying relatively similar across all the majors (in a mildly risk-off manner given JPY crosses)...

To put these divergences in CONTEXT, we can see from the lower chart that a) upper left shows the late-day recovery in HYG (and drop in VXX) that juiced relative risk model compared to the slow drop in SPY, b) the three charts on the right hand side shows the total disconnect between empirical correlation-driven risk models and today's price action as Treasuries (and 2s10s30s) dislocated, and c) lower left shows that VIX limped quietly up to what is more of a fair-value given the current levels of equities and credit.

Whatever the reason for the disconnect - QE unwinds or individual market technicals (flows) - it is unusual to see this kind of break-down which makes us think the picture is much less rosy than the S&P 1400ish headlines would suggest and the late-day rotation into IG credit also suggests less risk-appetite than the herd would like.

Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing

As we have repeatedly said in the past, the quarterly Flow of Funds (or Z.1) statement is most interesting not for the already public household net worth and leverage data which serves to make pretty charts and largely irrelevant articles, but due to its insight into the stock and flow of both the traditional financial system but far more importantly - into shadow banking. And this is where things get hairy. Because while equities may have returned to 2008 valuations, the credit shortfall across combined US liabilities - traditional and shadow - still has a $3.6 trillion hole to plug to get to the level from March 2008 (see first chart). It is this hole that is giving equities, which have already surpassed 2008 levels, nightmares. Because while the Fed is pumping traditional commercial banks balance sheets via reserve expansion (read: fungible money that manifests itself most directly in $5 gas at the pump) resulting in a $2.3 trillion rise in traditional liabilities from Q3 2008 through Q4 2011, what it is not accounting for is the now 15 consecutive quarters of shadow banking system contraction, which peaked at $21 trillion in Q1 2008, and in Q4 2011 declined to $15.1 trillion... and dropping. It is this differential that will be the source of the needed "Outside" money, discussed yesterday, and that is only to get equity valuations to a fair level! But considering the Fed's propensity to print at any downtick, this is very much a given, much to the horror of Dick Fisher. Any additional increase in stock prices will require not only the already priced in $3.6 trillion, but far more direct Outside money injections.

While we have explained the methodology of approaching consolidated credit money in modern finance before (much more here), here is a quick rerun. In the chart below, conventional wisdom only focuses on the red line, which represents traditional commercial bank liabilities (L.110, L.111, L.112 and L.113 from the Z.1), where Fed reserves and other monetary expansion mechanisms manifest themselves. As can be seen this line is rising rapidly, as is to be expected - in tune with the US deficit spending and Fed reserve growth. That both the US debt chart and the consolidated global balance sheet have now entered an exponential phase is a topic for another discussion.

What, however, is always forgotten is the blue line, which represents the liabilities in the shadow banking system - all the credit money that has been used by various unregulated institutions to perform the traditional transformations of maturity, credit and liquidity that define a "bank." And this line is for lack of a better word, collapsing. It is this collapse that the Fed has yet to tackle, and it is the offset of this collapse which the equity market has somehow already priced in!

Focusing exclusively on shadow banks, here are the 6 distinct components that make up this universe.

Why does the Fed never discuss the shadow banking "conundrum" in public? Simple. The chart below should explain it.

Finally the chart that puts it all into perspective: here is a close up of the consolidated Shadow + Traditional liability total. The delta from the prior peak is an all too real hole of $3.6 trillion (and possibly more when accounting for the factor contraction at the Prime Broker level, a topic discussed previously when we spoke in length on the issue of rehypothecation). Yet it is this hole that the market is 100% certain that the Fed will plug. Because if it doesn't, watch out below.

And not only that, but since it is suddenly fashionable to sell US Treasurys, just who will step in to buy (not China) considering there is about $6 trillion in net new issuance over the next 4 years? Because if US GDP was at least rising faster than US debt one just may have made the case that there will be retained cash by various entities who can buy up US paper domestically. Alas, that is no longer feasible, and the only option is, you guessed it, for the buyer of last resort to step in - the @FederalReserve

In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals. We, and certainly China, thank you from the bottom of our hearts.